The German election and markets

sep 22, 2017

por BlackRock

Key takeaways

Germany will hold national elections for Chancellor on September 24 with Angela Merkel seeking a fourth term. The election occurs at a time when Europe is enjoying an above-trend pace of economic growth and a broadening recovery, which has helped make Europe one of the favored investor regions this year (even if the euro’s strength is prompting inflows to slow). With many European elections in recent years having surprise results that moved markets, investors are wise to monitor developments leading up to the vote.

We believe a Merkel win would likely be positive for markets, although we do not expect a strong reaction given that current polls show Merkel with a healthy lead. Instead, the makeup of the government could have greater ramifications.

A Merkel win would likely lead to either the reinstatement of the current grand coalition between the conservative Christian Democratic Union-Christian Social Union (CDU-CSU) alliance and the Social Democrats (SPD), a new three-way coalition with the liberal FDP and the Greens, or even to a CDU/FDP coalition.

Any of these scenarios is potentially favorable for German equities, with the inclusion of the FDP in any governing coalition adding even more impetus.

We see a more muted increase in German bond yields under Merkel than an SPD-led government.

What might the German election mean for markets?

Although the SPD has typically managed to gain or recover ground in the immediate run-up to general elections, the 15% lead held by the CDU at the time of writing1 looks hard to beat.

A Merkel win would likely lead to either the reinstatement of the current grand coalition between the conservative Christian Democratic Union-Christian Social Union (CDU-CSU) alliance and the Social Democrats (SPD), a new three-way coalition with the liberal FDP and the Greens, or even to a CDU/FDP coalition.

We believe that any of these scenarios would be favorable for German equities, with the inclusion of the FDP in any governing coalition adding even more impetus. We see a more muted increase in German bond yields under Merkel than an SPD-led government.

Should the result fall in line with expectations, we will be closely watching not only Merkel's choice of coalition partner (or partners) but which ministries will be held by which party. Both coalition make-up and ministerial responsibility could have a significant impact on economic policy over the term of the next government – and therefore what we might expect from markets.

A Merkel victory could signal greater European integration, particularly following President Emmanuel Macron’s election as president of France earlier this year. However, it is also important to place the election in the context of a broader European economic recovery. Europe is enjoying an above-trend pace of economic growth and has been one of the favored regions among investors in 2017. Recent strength of the euro has slowed inflows, however. Ultimately, the pace of economic growth may have a greater impact on German equities than the election outcome.

Equities: It is important to note that while a Merkel victory may be interpreted as market positive, we do not expect a strong equity market reaction given her lead in the polls and the relative recent calm in markets. Nonetheless, a look at what happened to the German equity market – below represented by the MSCI Germany Index – in the days and weeks following the last three CDU/Merkel victories shows why some investors may view a returning Merkel as market positive, although past performance is not a guide to future performance, of course.

German market’s performance around previous elections

Chart shows performance of MSCI Germany Index, 50 trading days before/after a Merkel win at a general election. Performance is expressed on a total return basis with net income reinvested. Source: Thomson Reuters Datastream, BlackRock Investment Institute, as of 8/2/17. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Bonds: We see a Merkel government as likely to produce less upward pressure on German bund yields over the course of the next term compared to an SPD government led by Martin Schulz.

How might markets react to a Merkel defeat?

Equities: In the seemingly unlikely event of a defeat for the incumbent chancellor, we would expect the initial market reaction to be strong and for German equities to sell off. That said, we don’t believe an SPD-led federal government would inevitably lead to any such underperformance over the longer term.

Bonds: In bond markets, a more relaxed approach to budgetary discipline under the SDP could push bund yields up slightly more than we foresee under any variation of a CDU-led government – including that of an SPD-led BMF as part of a grand coalition. It is our belief, however, that the difference between what either of these election outcomes could mean for bond yields would be limited.

Conclusion

Germany faces broader underlying issues – such as the problems facing the German car industry – which we believe will likely not be affected one way or the other by the result, at least in the short term.

Nevertheless, significant political levers do exist. In addition to technological change, we believe that investors may wish to consider the current positive European environment, where we see spreading growth and improving earnings continuing to support and shape the recovery of the eurozone economy in the years to come.

Both Angela Merkel and her opponent, Social Democratic Party head Martin Schulz, have positioned themselves as defenders of European integration. So long as this present positive view of the EU is maintained or even improves, we believe the eurozone and therefore Germany could remain attractive to foreign investment.

THIS IS A PRIVILEGED AND CONFIDENTIAL COMMUNICATION BETWEEN BLACKROCK AND SELECTED INDIVIDUALS AND HAS BEEN PROVIDED TO YOU ON A CONFIDENTIAL BASIS FOR INFORMATION PURPOSES ONLY. RELIANCE UPON INFORMATION IN THIS MATERIAL IS AT THE SOLE DISCRETION OF THE READER.

This material represents an assessment of the market and political environment as of the date hereof; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results.

This material may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. BlackRock assumes no duty to and does not undertake to update forward-looking statements. Please note all information shown is based on assumptions, therefore, exclusive reliance on these assumptions is incomplete and not advised. There is no guarantee that any forecasts made will come to pass. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information that is presented herein by way of example. Opinions and estimates offered herein constitute the judgment of BlackRock and are subject to modification, change or supplement without prior notice to you.

The opinions expressed are as of September 18, 2017 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. BlackRock believes that the information in this document was correct at the time of compilation, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents.

No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written consent of BlackRock.

In Latin America and Iberia, for Institutional Investors and Financial Intermediaries Only (Not for public distribution).This material is for educational purposes only and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. It is possible that some or all of the funds mentioned in this document have not been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country, except for Chile where certain funds have been registered with the Superintendencia de Valores y Seguros (or SVS) for public offering and in Mexico where certain funds have been listed on the Sistema Internacional de Cotizaciones (SIC) exchange of the Bolsa Mexicana de Valores. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America.

Regulatory Information

BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority ('FCA'), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection, calls are usually recorded. iShares plc, iShares II plc, iShares III plc, iShares IV plc, iShares V plc, iShares VI plc and iShares VII plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Central Bank of Ireland. The German domiciled funds are "undertakings for collective investment in transferable securities" in conformity with the directives within the meaning of the German Law on the investments. These funds are managed by BlackRock Asset Management Deutschland AG which is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht.

For investors in Portugal

Some of the Funds are not authorised by Comissão do Mercado dos Valores Mobiliários for public commercialization in Portugal. The offer of the funds is legally qualified as a private placement as it is exclusively addressed to institutional investors as final investors and was not preceded or accompanied by any promotion, or by the obtention of investment orders before undetermined investors or by an advertisement promotion, pursuant to Decree Law no. 63-A/2013, dated as of May 10, 2013. Any decision to invest must be based solely on the information contained in the Company’s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should acknowledge the fund specific risks in the Key Investor Information Document and the Company’s Prospectus.

For investors in Spain

The funds mentioned are registered for public distribution in Spain.The sales Prospectus has been registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores ('CNMV')). The funds which are registered in the official registry of the Spanish Securities and Exchange Commission (CNMV) are iShares plc (registration number 801), iShares II plc (registration number 802) and iShares III plc (registration number 806), iShares IV plc (registration number 1402), iShares V plc (registration number 977), iShares VI plc (registration number 1091), iShares VII plc (registration number 886) and iShares (Lux) (registration number 905). The official registry, CNMV, must always be checked to see which sub funds of the funds mentioned are registered for public distribution in Spain. Any decision to invest must be based solely on the information contained in the Company’s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts, copies of which can be obtained free of charge at www.iShares.es. Investors should read the fund specific risks in the Key Investor Information Document and the Company’s Prospectus. This document contains products or services of BlackRock, Inc. (or affiliates thereof) that might be offered directly or indirectly within the Andorran jurisdiction, and it should not be regarded as solicitation of business in any jurisdiction including the Principality of Andorra.

For investors in Latin America

In Chile, the offer of each security not registered with the SVS began on the date as indicated for such fund as described herein and the offer of such securities is subject to General Rule No. 336 issued by the SVS. The subject matter of this offer may include securities not registered with the SVS; therefore, such securities are not subject to the supervision of the SVS. Since the securities are not registered in Chile, there is no obligation of the issuer to make publicly available information about the securities in Chile. The securities shall not be subject to public offering in Chile unless registered with the relevant registry of the SVS.

In Colombia, the offer of each Fund is addressed to less than one hundred specifically identified investors, and such Fund may not be promoted or marketed in Colombia or to Colombian residents unless such promotion and marketing is made in compliance with Decree 2555 of 2010 and other applicable rules and regulations related to the promotion of foreign financial and/or securities related products or services in Colombia.

In Mexico, this material is for the sole use of Qualified and Institutional Investors. BlackRock, Inc., and any applicable affiliates thereof, have represented and agreed that it has not and will not publicly distribute this document in Mexico and that it has not offered and will not offer or sell publicly the securities in Mexico. No action has been or will be taken in any jurisdiction that would permit a public offering of the securities or the possession, circulation or distribution of this document or any other material relating to the company or the securities in any jurisdiction where action for that purpose is required.

In Peru, this material is for the sole use of Institutional Investors, as such term is defined by the Superintendencia de Banca, Seguros y AFP.

Restricted Investors

This document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan.

Risk Warnings

Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to current or future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information. Investment should be made on the basis of the relevant Prospectus which is available from the manager.

In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited.

Index Disclaimers

Bloomberg® is a trademark and service mark of Bloomberg Finance L.P. (collectively with its affiliates, “Bloomberg”). Barclays® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays are affiliated with BlackRock Fund Advisors or its affiliates, and neither Bloomberg nor Barclays approves, endorses, reviews, or recommends the iShares ETFs. Neither Bloomberg nor Barclays guarantees the timeliness, accurateness, or completeness of any data or information relating to 'Bloomberg Barclays Germany Treasury Bond Index'. Neither Bloomberg nor Barclays shall be liable in any way to the BlackRock Fund Advisors or its affiliates, investors in the iShares ETFs or to other third parties in respect of the use or accuracy of the 'Bloomberg Barclays Germany Treasury Bond Index' or any data included therein.

DAX® and MDAX® are registered trademarks of Deutsche Börse AG.

EURO STOXX 50® is the intellectual property (including registered trademarks) of STOXX Limited and/or of its licensors (“licensors”), and is used under a licence. The iShares ETF is not sponsored, subscribed, sold or promoted by STOXX and its licensors and none of them bear any liability in this respect.

BLACKROCK IS NOT AUTHORIZED TO RECEIVE DEPOSITS, CARRY OUT INTERMEDIATION ACTIVITIES, OR ACT AS A BROKER DEALER, BANK OR A MUTUAL FUND OPERATING COMPANY IN MEXICO.